Elliot Ganz Speaks On Third-Party Releases

It is axiomatic that “where you stand depends on where you sit”. Since I “sit” as the Co-head of Public Policy at the Loan Sales and Trading Association, when I think about the recent decisions on third party releases in Purdue and Ascena, my focus turns to their potential political implications. Paradoxically, while the cases address non-debtor releases, the political fallout will land elsewhere and generate significant momentum for long overdue bankruptcy venue reform.

Purdue Pharma famously handpicked the White Plains branch of the Southern District of New York bankruptcy court specifically to ensure that Judge Robert Drain would preside. The success of the reorganization plan hinged on a deal to exchange significant payments by members of the Sackler family for broad non-debtor releases and Judge Drain had a well-deserved reputation as being willing to approve such arrangements. Similarly, the Ascena case, like several other recent retail cases, was brought in the bankruptcy court in Richmond, Virginia because of its reputation for approving broad third-party releases. Indeed, in his opinion reversing the bankruptcy court’s decision to approve the releases in that case, Judge Patterson implicitly called out the venue shopping, noting that, the “ubiquity of third-party releases in the Richmond Division demands even greater scrutiny of the propriety of such releases.”

Many academics, practitioners and legislators have long advocated reform of what they consider the abuse and gaming of the bankruptcy venue (and judge selection) rules and, in the wake of these two cases (and the very public and aggressive venue machinations in the J&J mass tort bankruptcy), these efforts appear to be gaining traction. As the Creditor Rights Coalition points out in its recent comment letter to the Southern District of Texas, courts in two important federal districts have already reformed their own rules to require random selection of judges. And, in a July 2021 hearing before the House Judiciary Committee ostensibly focused on the issue of non-debtor releases such as those in Purdue, Boy Scouts of America and USA Gymnastics, several witnesses called out the perceived abuses of “judge-shopping“ and called for passage of the bi-partisan Bankruptcy Venue Reform Act of 2021 which is designed to end it.

Similar bills have been introduced in Congress for over a decade and have always died on the vine. Will the current momentum be enough to get a venue bill through Congress? The answer is probably not (although not impossible). So, for the foreseeable future, we are likely to continue to see regional successes at the district court level derived through effective, grassroots efforts.